According to Swiss Re, litigation expenses have led to a 57% rise in liability claims in the U.S. over the past decade, culminating in a peak increase of 7% in 2023.
Understanding Social Inflation
Social inflation refers to the phenomenon where insured liability claims escalate more rapidly than can be accounted for by economic conditions such as wage growth or consumer price inflation. This increase has been fueled by various factors, including systematic abuses in the legal process, third-party litigation funding (TPLF), and surging compensation settlements.
Factors Contributing to Social Inflation
The rise of social inflation in the U.S. can be traced to an increased propensity to settle compensation disputes in court, with tort law heavily relying on precedents and jury decisions. TPLF is enhancing access to trials, with the legal framework often permitting large payouts, especially for bodily injury cases. Influential strategies employed by trial lawyers and shifting juror sentiments toward social issues and corporations further intensify this trend, according to Swiss Re.
Challenges for Businesses
As litigation costs rise, U.S. businesses encounter an increasingly perilous and expensive landscape. The report highlights that corporations are facing notable increases in legal defense costs, which are typically passed to consumers through higher prices. Large corporations saw an average annual increase of 10% in defense expenses from 2018 to 2023, shaping decisions on business locations and operations.
Impact on Insurers
The consequences for insurers have been substantial, with claims costs soaring. U.S. commercial casualty losses have climbed at an annual average of 11%, reaching $143 billion in 2023, outstripping total insured losses from global natural disasters. Over the last five years, U.S. liability lines exposed to bodily injury claims accumulated underwriting losses totaling $43 billion. In light of these troubling trends, insurers have curtailed the capacity they are willing to offer to global businesses.
Global Signs of Social Inflation
While social inflation is predominantly a U.S. issue, emerging signs suggest its influence is spreading to other common-law countries such as the United Kingdom, Australia, and Canada. In 2023, social inflation accounted for over 10% of liability claims in the U.K., largely due to cascading effects from large compensation awards in U.S. court cases. Similarly, Australia and Canada experienced around a 7% impact from mass tort claims.
Future Implications
Although social inflation has not yet significantly affected European nations like France and Germany—where tort law is more structured and decisions are made by judges rather than juries—this could shift due to upcoming legislative changes in the European Union that may pave the way for mass tort claims. Swiss Re warns that such developments could lead to increased social inflation in Europe in the future.
For a comprehensive overview, view the full report here.
